Daiwa House REIT Investment Corporation (TSE:8984) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

Daiwa House REIT Investment's (TSE:8984) stock up by 3.1% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Particularly, we will be paying attention to Daiwa House REIT Investment's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Daiwa House REIT Investment

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Daiwa House REIT Investment is:

3.9% = JP¥20b ÷ JP¥509b (Based on the trailing twelve months to August 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Daiwa House REIT Investment's Earnings Growth And 3.9% ROE

On the face of it, Daiwa House REIT Investment's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 5.8% either. As a result, Daiwa House REIT Investment reported a very low income growth of 3.4% over the past five years.

Next, on comparing Daiwa House REIT Investment's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.1% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Daiwa House REIT Investment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Daiwa House REIT Investment Making Efficient Use Of Its Profits?

Daiwa House REIT Investment seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 65% (or a retention ratio of 35%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was lower as a result of the high payout.

In addition, Daiwa House REIT Investment has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we have mixed feelings about Daiwa House REIT Investment. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.